Fitch Affirms Corporacion Andina de Fomento's IDR at 'AA-'; Outlook Stable
The affirmation of CAF's IDRs and senior debt ratings reflects Fitch's expectation that CAF will maintain its strong financial profile over the forecast horizon.
KEY RATING DRIVERS
CAF's ratings are primarily driven by intrinsic factors. The affirmation and Stable Outlook reflect the following key rating factors:
Asset quality is a key rating strength for CAF. Its loan quality indicators have been strong despite economic volatility in its countries of operation. There have been no impaired loans in its public-sector loan portfolio since inception. In addition, the multilateral development bank (MDB) has reported negligible to no private-sector past-due loans (PDLs) since 2006.
Sustained capital contributions and steady internal capital generation support CAF's ample capitalisation ratios. Its prudential framework requires a minimum total capital/weighted risks ratio (Basel II since 2007) of 30%. In practice, the reported ratio has been well above this minimum. At 1.9x, CAF's usable capital/required capital is low relative to higher-rated MDBs, though this is offset by a higher level of equity / adjusted assets ratio.
At end-September 2015, total subscribed capital included USD1.3bn of unpaid subscribed capital that is scheduled to be paid under the current capital replenishment program that ends in 2017. Furthermore, on Nov. 27, 2015 the Board of Directors approved a new general capital increase program for a total amount of USD 4.5 billion, which will be payable between 2017 and 2023. Under a scenario of 10% asset growth per year, CAF's capital ratios will remain relatively stable over the medium-term.
CAF has been able to operate without difficulty in successive periods of instability in the region due to conservative risk management policies and member countries' support. Market risks are mitigated by hedges on all interest and foreign-exchange exposures, while liquidity is strong.
Given CAF's countercyclical role, the five largest exposures represented a high 59.3% of total loans at end-September 2015. While this level is similar to other sub-regional MDBs (all rated lower than CAF), it is high compared with a median of around 31% for all MDBs rated by Fitch at YE14. However, Fitch Ratings expects loan concentration to gradually decline as lending to new member countries increases.
Although CAF's ratings are driven by intrinsic factors, Fitch considers shareholder support to be strong despite member countries' creditworthiness being weaker than at higher-rated MDBs. This has been demonstrated by continuous capital contributions that have been paid on time or ahead of schedule. The shareholders are mostly governments and public agencies. CAF also benefits from similar privileges and immunities granted to other MDBs.
The Stable Outlook reflects Fitch's assessment that CAF's credit profile will remain commensurate with its 'AA-' rating. The factors that could, individually or collectively, affect CAF's ratings are:
CAF's ratings could benefit from a substantial improvement in in loan diversification or an increase in capitalisation ratios, although such developments are unlikely in the near term.
Although not Fitch's base-case scenario, a sustained deterioration in CAF's financial profile or stress in a member country that affects the benefits of its preferred-creditor status could result in downward pressure on creditworthiness.
The ratings and Outlook are sensitive to a number of assumptions as follows:
Member countries, even if experiencing severe difficulties (such as Argentina, rated 'RD', or Venezuela, rated 'CCC'), will continue to honor CAF's preferred creditor status and exempt its private sector borrowers from any measures that may impact the transfer and/or convertibility of their debt service payments, should any member country decide to default selectively to their creditors.
CAF will maintain its conservative risk management, which should sustain a steady financial performance and a risk profile compatible with its current ratings.
Fitch has affirmed CAF's ratings as follows:
--Long-term IDR at 'AA-'; Outlook Stable;
--Short-term IDR at 'F1+';
--Senior unsecured debt at 'AA-';
--Commercial paper at 'F1+';
--Long-term National Rating in Venezuela at 'AAA(ven)'*; Outlook Stable;
--Short-term National Rating in Venezuela at 'F1+(ven)';
--Long-term National Debt Rating in Mexico at 'AAA(mex)';
--Long-term National Debt Rating in Panama at 'AAA(pan)'.
*The 'AAA(ven)' rating is equivalent to an 'A1' rating when using the mandatory rating scale required by the local Securities Exchange Commission.